This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

August 29, 2012

Buffett’s $8 Billion Trade Isn’t a Bet Against Munis: LPL’s Valeri

The Berkshire Hathaway muni derivatives sale is ‘the closing out of a profitable trade’ and not a negative bet on the muni market, Valeri argues

Muni investors, take heart: Warren Buffett’s recent sale of $8 billion in credit derivatives was simply a profitable trade—and not a comment on the overall value of the municipal bond market.

So says LPL Financial Market Strategist Anthony Valeri in “Municipal Misconceptions,” a comment published Tuesday on the renowned Berkshire Hathaway CEO’s second-quarter sale of $8 billion worth of municipal derivatives contracts. Valeri’s comment came on the heels of news that circulated late in August over Buffett’s decision to close out his large position in credit default swaps insuring municipal debt.

“We simply view the Berkshire Hathaway sale for what it is — the closing out of a profitable trade,” Valeri writes. “We believe Berkshire would have likely sold the entire position, rather than just half, if there was true concern for broad-based municipal credit quality.”

The insurance-like contracts were originally purchased by Lehman Brothers Holdings in 2007, more than a year before the firm filed for bankruptcy, according to an Aug. 21 report in The Wall Street Journal. “It isn't clear whether Berkshire's move will leave the company with a profit or loss on the wager,” the WSJ reported. “Mr. Buffett, Berkshire's 81-year-old chairman and chief executive, declined to comment.”

Following that report, columns in media sources including the New York Post and Reuters disputed whether or not Buffett’s trade amounted to a negative bet on state and local governments as well as the overall muni market.

But Valeri says the media buzz on Buffett’s trade was misleading in its suggestion that state credit quality is deteriorating. The truth is that Buffett’s sale is far from a negative bet on the muni market, Valeri argues.

“If Berkshire did have a negative view of the municipal bond market, it could have easily placed a bearish bet but did not,” Valeri writes. “Buffett and Berkshire Hathaway declined to comment to reporters on the motive for the trade but we believe Berkshire simply found a more attractive investment on a go-forward basis.”